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Activity Based Costing: Answer

Top management support and cross-functional involvement are crucial for implementing an activity-based costing (ABC) system because management provides leadership and authority to link ABC data to rewards, while cross-functional teams have operational knowledge and help reduce resistance. ABC differs from traditional costing by assigning unique overhead rates to each product based on its use of different activities or cost pools, rather than applying an equal rate. It more accurately assigns costs through multiple cost categories like unit, batch, product, and facility levels. ABC is unacceptable for external reports because it excludes some costs and includes non-manufacturing costs, and the initial allocations rely on interviews rather than objective data.

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Mitch Tokong Minglana
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588 views

Activity Based Costing: Answer

Top management support and cross-functional involvement are crucial for implementing an activity-based costing (ABC) system because management provides leadership and authority to link ABC data to rewards, while cross-functional teams have operational knowledge and help reduce resistance. ABC differs from traditional costing by assigning unique overhead rates to each product based on its use of different activities or cost pools, rather than applying an equal rate. It more accurately assigns costs through multiple cost categories like unit, batch, product, and facility levels. ABC is unacceptable for external reports because it excludes some costs and includes non-manufacturing costs, and the initial allocations rely on interviews rather than objective data.

Uploaded by

Mitch Tokong Minglana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Minglana, Mitch T.

BSA 301

ACTIVITY BASED COSTING


7–1 In what fundamental ways does activity-based costing differ from traditional
costing methods such as job-order costing as described in Chapter 3?

ANSWER:
The fundamental differences between ABC costing and traditional costing systems are
that in traditional costing you accumulate all product costs and create a pre-determined
overhead rate. Then, you apply an equal burden of the driver to each product. However,
in the ABC method, you divide each activity into cost pools, "buckets", then you apply an
overhead rate unique to each product and how much of each activity base, or "driver",
that it uses. One thing to remember, even though ABC has multiple rates, and the burden
is different between methods, they both have the same total overhead.

7–2 Why is direct labor a poor base for allocating overhead in many companies?

ANSWER:
Direct labor is a poor base for allocating overhead in companies that involve a lot of
automated service. Also, it would be a poor base for companies that are based on
customer service because there is no direct labor applied to producing a product.

7–3 Why are top management support and cross-functional involvement crucial when
attempting to implement an activity-based costing system?

ANSWER:

Management:
-provide leadership that is needed to properly motivate all employees to embrace the
ABC system
-Top managers have the authority to link ABC data to the employee evaluation and
reward system.

Cross functional:
-possess intimate knowledge of operations that is needed to design an effective ABC
system.
-By using their knowledge it lessens the resistance to ABC because they feel that they
have helped the process

7–4 What are unit-level, batch-level, product-level, customer-level, and


organizationsustaining activities?

ANSWER:

To assign overhead costs more accurately, activity‐based costing assigns activities to one
of four categories:

 Unit‐level activities occur every time a service is performed or a product is made.


The costs of direct materials, direct labor, and machine maintenance are examples
of unit‐level activities.
 Batch‐level activities are costs incurred every time a group (batch) of units is
produced or a series of steps is performed. Purchase orders, machine setup, and
quality tests are examples of batch‐level activities.
 Product‐line activities are those activities that support an entire product line but
not necessarily each individual unit. Examples of product‐line activities are
engineering changes made in the assembly line, product design changes, and
warehousing and storage costs for each product line.
 Facility support activities are necessary for development and production to take
place. These costs are administrative in nature and include building depreciation,
property taxes, plant security, insurance, accounting, outside landscape and
maintenance, and plant management's and support staff's salaries.

7–5 What types of costs should not be assigned to products in an activity-based costing
system?

ANSWER:
-organization-sustaining costs
-customer level costs

Costs of idle capacity should not be assigned to products, these costs represent resources
that are not consumed by the products
7–6 Why are there two stages of allocation in activity-based costing?

ANSWER:
In activity-based costing, costs must be allocated to activity cost pools and then they are
allocated from the activity cost pools to products, customers, and other cost objects.

7–7 Why is the first stage of the allocation process in activity-based costing often
based on interviews?

ANSWER:
Because people are often involved in more than one activity, some way must be found to
estimate how much time they spend in each activity. The most practical approach is often
to ask employees how they spend their time. It is also possible to ask people to keep
records of how they spend their time or observe them as they perform their tasks, but
both of these alternatives are costly and it is not obvious that the data would be any
better. People who know they are being observed may change how they behave.

7–8 When activity-based costing is used, why do manufacturing overhead costs often
shift from high-volume products to low-volume products?

ANSWER:
In traditional cost systems, product-level costs are indiscriminately spread across all
products using direct labor-hours or some other allocation base related to volume. As a
consequence, high-volume products are assigned the bulk of such costs. If a product is
responsible for 40% of the direct labor in a factory, it will be assigned 40% of the
manufacturing overhead cost in the factory-including 40% of the product level costs of
low-volume products. In an activity based costing system, batch-level and product-level
costs are assigned more appropriately. This results in shifting product-level costs back to
the products that cause them and away from the high-volume products. (A similar effect
will be observed with batch-level costs if high-volume products are produced in larger
batches than low-level products.)
7–9 How can the activity rates (i.e., cost per activity) for the various activities be used
to target process improvements?

ANSWER:
Activity rates tell managers the average cost of resources consumed to carry out a
particular activity such as processing purchase orders. An activity whose average
cost is high may be a good candidate for process improvements. Benchmarking can
be used to identify which activity at a significantly lower cost, it is reasonable to
suppose that improvement may be possible.

7–10 Why is the activity-based costing described in this chapter unacceptable for
external financial reports?

ANSWER:
The activity-based costing approach described in the chapter is probably unacceptable for
external financial reports for two reasons. First, activity-based product costs, as described
in this chapter, exclude some manufacturing costs and include some non-manufacturing
costs. Second, the first stage allocations are based on interviews rather than verifiable,
objective data.

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